Over the past four decades, the U.S. has seen a dramatic increase in the proportion of homeowners to the U.S. population, peaking just short of 70% in the first quarter of 2005, according to the U.S. Census Bureau. Since then, homeownership has declined to the low 60s. The rate of homeownership is likely to continue to decline further into the mid-to-low 50s as changes in demographic trends, increased regulation and stagnant real incomes all work to make the dream of homeownership more difficult to achieve.
The housing boom of the 2000s was a bubble supported not just by easy credit, but also by a wave of Americans entering peak childbearing and household-spending years. As these relatively affluent households age and migrate away from single-family homeownership, there is an insufficient supply of new homeowners to replace them.
While the recovery of U.S home prices from their nadir in 2012 was largely driven by a lack of supply, the longer term challenge facing the industry will be a dearth of demand — namely, homebuyers and mortgage credit.
Along with the demographic headwinds facing the housing market, increased regulation will also be a drag on housing. The Dodd-Frank Act marked an expansion of federal oversight over the housing market that excludes roughly one-third of all Americans from the possibility of getting a mortgage. More stringent regulation has also reduced the willingness of depositories to make new loans to borrowers with less than pristine credit or to support the secondary markets for mortgages.
Federal housing finance regulation has increased the cost of originating and servicing a mortgage loan several-fold, resulting in a drain of capital out of the housing sector. As Kroll Bond Rating Agency noted in "Mortgage Servicing Rights: Catching the Falling Knife," the markets for MSRs, as well as the cash markets for securities issued by Fannie Mae, Freddie Mac and Ginnie Mae, presently are seeing an alarming reduction of liquidity. Banks are no longer willing to buy MSRs. Only three of the top 25 seller/servicers in the Federal Housing Administration loan market, for example, are depositories and this number is likely to fall further.
Another factor that will likely be a negative influence on homeownership rates in the U.S. is income. Income growth in the U.S., both nominal and in real, inflation-adjusted terms, has been flat for years. Consumers have adjusted to this fact by moving toward two income households and longer duration mortgages in order to buy a home.
The U.S. housing industry has gradually pushed the limits of leverage and credit in residential housing. In the 1970s, national banks were just starting to look at real estate as an asset class. Permitted loan-to-value ratios were in the 50% range. Ed Pinto at American Enterprise Institute reiterates in a recent Real Clear Markets comment that "today's FHA borrower can purchase a home selling for twice as much as one with the underwriting standards in place in 1954 — but without a dollar's increase in income!"
The key tenet of neo-Keynesian economics as practiced in the U.S. is to pull tomorrow's sale into today. The Federal Open Market Committee has maintained progressively lower levels of average interest rates, in large part to boost activity in the housing and consumer sectors. Over the next four decades, demographics, regulation and the fact that interest rates cannot go any lower may make traditional policy tools far less effective.
Christopher Whalen is a senior managing director at Kroll Bond Rating Agency.
